Human capital is the total economic value of an individual’s skills and talents and is estimated as the present value of future wages. It is seen as a way to quantify a person’s earning ability. The riskiness of human capital is based on an individual’s occupation and industry; however, it is typically considered a relatively bond-like asset. Human capital can be the largest asset in younger individuals’ total wealth portfolios, suggesting that portfolios of these individuals should be more aggressive than those of older people (with less human capital) and the reason why target-date fund providers suggest a decreasing equity glide path as an individual approaches retirement.
The original article also says it is important to consider the relationship of human capital to different investment assets and that it applies especially to holding stock in your employer. A negative event for the company (something economists call a “shock”) could cause an individual’s investment capital and human capital (job loss) to fall simultaneously. Enron is a good illustration, where former employees found out that, not only were they out of work, but their 401(k) savings were cut in half as over 50% of the plan’s assets were invested in Enron stock.
So, do not try to invest with an “island” mentality, a portfolio that is not set to the individual for maximum efficiency. No portfolio can be efficient without considering an investor’s total wealth.
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